Income Tax Department Issues Regulations for Valuing Startup Investments, Addressing 'Angel Tax'

The Income Tax Department has introduced new rules regarding 'angel tax,' which outline how to assess the shares issued by unlisted startups to investors. 

This change is a result of the 2023 Finance Act, which amended the Income-tax Act, 1961, to include consideration received from non-residents for the issuance of shares by unlisted companies under section 56(2)(viib). 

This means that if the consideration for issuing shares exceeds their Fair Market Value (FMV), it will be subject to income tax as 'Income from other sources.

In accordance with the government's commitment to engage with the public and stakeholders when creating new laws, we invited suggestions and feedback regarding the Draft Rule 11UA. 

This rule pertains to methods used to calculate the Fair Market price. We issued a Press Release on May 19, 2023, seeking input from stakeholders and the general public. 

After receiving valuable feedback and engaging in detailed discussions with stakeholders, we have made changes to Rule 11UA. These changes specifically relate to how shares are valued for section 56(2)(viib) of the Act. You can find the details of these modifications in notification no. 81/2023, dated September 25, 2023.

Following are the key highlights of Rule 11UA Amendments

a) Besides the two valuation methods available to residents, which are the Discounted Cash Flow (DCF) and Net Asset Value (NAV) methods, non-resident investors now have access to five additional methods. These methods comprise the Comparable Company Multiple Method, Probability Weighted Expected Return Method, Option Pricing Method, Milestone Analysis Method, and Replacement Cost Method.

b) When a company receives consideration for issuing shares from a non-resident entity notified by the Central Government, the price of the shares corresponding to this consideration can be considered as the Fair Market Value (FMV) for both resident and non-resident investors, with the following conditions:

(i) The consideration from this FMV doesn't exceed the total consideration received from the notified entity, and

(ii) The company has received this consideration from the notified entity within ninety days before or after the date of issuing the shares that are being valued.

c) A similar approach for price matching between resident and non-resident investors will apply in cases involving investment by Venture Capital Funds or Specified Funds.

d) The rules also cover the valuation methods for determining the FMV of Compulsorily Convertible Preference Shares (CCPS).

e) Additionally, a safe harbor allowing for a 10% variation in value has been established.

These new rules expand the range of valuation methods, aligning them with globally accepted standards and ensuring fairness between resident and non-resident investors.

Also Read: Paying TDS/TCS/Demand Online With ITNS 281 Challan

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